There’s a simple story being told in tokenization circles. Regulators are going to forbid stablecoins from paying yield, and that’ll take away the reason to hold one, which then leaves a settlement pipe with no business of its own. So the banks win again and stablecoins end up demoted to plumbing. Now the yield prohibition is definitely real and the enforcement posture does feel reasonably aggressive, which means the consumer wallets that bought their users with out of compliance yield are likely going to have to find some other incentives.
However what this story may miss is the matchup. It assumes the fight is banks against stablecoins, a contest over whose dollar holds the nations idle cash. I’m not sure that was ever the fight. I tend to read the drafts for what I think they are, a deliberate sorting of money by function, and I think you can see what happens to the yield if you forbid it on the instrument that moves and allow it on the instrument that sits. My bet is the yield bearing dollar goes neither to the bank nor to the stablecoin issuer. It’ll go to capital markets.
What the drafters drew
None of this is final yet. The GENIUS Act gave the agencies a year to write the implementing rules, and the year expired on July 18 with all the 25 required rules still proposals, the OCC, FDIC, FinCEN, OFAC, and the June identity rule alike. CLARITY spent the summer stuck short of a Senate floor vote, and then, in the early hours of the Saturday before recess, Thune filed the motion that queues its first procedural test for the Senate’s return on September 14. And from what I can tell stablecoin yield and rewards are, by the negotiators own account, among the items still open in that text. The perimeter of the ban is being argued about right now, on September’s calendar. But the drafts already share a design, and really that design is the point.
Start with the AML and identity drafts, because they put their line in the sand in a rather deliberate place. The heavy obligations fall on the primary market, where someone mints or redeems directly with the issuer. The secondary market, the coin moving hand to hand between holders, gets carved out. FinCEN has proposed no monitoring and no suspicious activity reporting on secondary market transfers. The issuer’s duties follow its own technological controls, the freeze and the block, not the coin moving between holders, and the June identity draft draws the same line. The rule writers looked at a bearer instrument circulating freely and well they have seem to have chosen to leave the circulation alone.
The yield ban is actually clearer than its given credit for, with the prohibition in section 4(a)(11) of GENIUS that no issuer may pay a holder interest or yield solely in connection with the holding, use, or retention of the coin. Whats noticeable is how the drafts and the bill chase the yield outward, hop by hop. The OCC then went past the statute and added a rebuttable presumption so if you route the spread to an affiliate that then pays holders for holding the coin, and the OCC will treat it as prohibited interest unless you can prove otherwise. The text being negotiated for September feels like it’ll chase it a hop further, to the exchanges and wallets that currently pay what the issuer can’t. When you look at it, each extension doesn’t extinguish the yield, it pushes it one legal form further from the actual coin. Merchant discounts and activity based rewards stay open throughout, in the OCC’s draft and the CLARITY bill too. You cannot be paid to hold the stablecoin but you can be paid to spend it. Yield on money that sits is banned and rewards on money that moves are fine.
A tokenized deposit is still a deposit. The FDIC’s proposal would treat one no differently from any other and the GENIUS Act expressly excludes deposits from the stablecoin definition, so banks can pay interest on deposits as they always have. Really its like the drafts leave two instruments with opposite freedoms. The stablecoin moves bearer style, with no one checking who holds it, and cannot pay a cent for being held. The deposit pays interest, carries insurance, and stays inside the banks perimeter. One is built to move and not earn. The other is built to earn and not move freely.
Ok so money that travels gives up its yield, money that earns gives up its freedom to travel. You’ll have to forgive me the Father Ted’s reference, but the money that was just resting in my account, has been promoted further in terms of comedic art.
Whether your dollar is resting or moving is now the question that decides what its allowed to earn.
The 1980s already answered this
We’ve run the experiment before as I described in The End of Idle Money. Regulation Q capped what banks could pay on deposits while market rates ran past 12%, and savings left for money market funds, a capital markets instrument that held Treasury bills and passed the yield through. Money market funds held $77 billion by 1980. They hold $7.9 trillion today. The detail I left out in that article is that in 1977, Merrill Lynch bolted a checkbook and a card onto its money market fund and called it a cash management account. The savings instrument had a checking interface, and the checking account really had no excuse for holding a large balance. The prohibition didn’t protect the banks, it taught a generation of savers that a yield bearing version of their cash lived in a fund, not a branch. The deposit franchise survived, but I’m not sure it never really got its cheap funding back.
The yield ban on stablecoins reruns the same movie…
Where the yield goes
We can ban the yield on the coin all we want but it ain’t disappearing, its more than likely going to move to an instrument your wallet holds next to your coins. Those instruments are live, at scale, and growing faster than perhaps many of those debating has realized. When Circle’s USYC passed BlackRock’s BUIDL in March as the largest tokenized Treasury fund, the sector had just crossed a record $11 billion. Five months later it holds around $16 billion, with USYC near $3 billion and BUIDL at $2.7 billion, the usual caveat attached is that much of USYC’s supply sits with a handful of institutional holders. These are Treasury and money market funds run by asset managers. Franklin’s is a registered 1940 Act money fund; BUIDL and USYC are private and offshore funds sold under securities exemptions. The structures differ but the substance does not. They’re securities, not deposits and not stablecoins. Really the wrapper is acquiring the one feature it has lacked. WisdomTree took first of its kind SEC exemptive relief in February to let a registered government money fund trade and settle around the clock against USDC at a fixed dollar, and JPMorgan has a registered money fund of its own on a public chain. To me this is like Merrill’s 1977 move run in reverse. In 1977 the fund grew a checking interface. In 2026 the fund plugs into one that already exists and well, one that never closes.
The wallet holds the fund, earning Treasury yield, and swaps into a stablecoin at the instant a payment comes due, then swaps back. The BIS has measured how the adjacent behavior prices. Where remuneration is funded from the reserve economics, the yield tracks the policy rate the way a cash management instrument does. Coinbase’s USDC rewards are a loyalty program on paper, now tucked behind a subscription for US customers, and the rate has moved with the Fed anyway. It’s pretty clear that its a money market fund in all but name.
Sandy Kaul at Franklin Templeton calls stablecoins checking account equivalents, the cash you spend, a framing I borrowed two weeks ago in When the Deposit Beta Goes Agentic. Complete the analogy and the tokenized money market fund is the savings account, the cash that earns. The yield bearing dollar in that picture is a security, and the firm that runs it is an asset manager.
So we have a fund that pays yield, the stablecoin that provide the rail, and the holder can’t, and doesn’t need to, tell the difference. Circle now has both halves, USDC for the motion and USYC for the yield, which I think shows where they think the value sits. An issuer keeps the float on its reserves, its the spread that earned Circle $2.7 billion in 2025 and another $668 million of reserve income in the second quarter of this year, on $73 billion of USDC outstanding. Look closer, though, and even the float is being competed away through the back door. Circle handed roughly $1 billion of its $1.7 billion of 2024 interest income to distributors, and by that I mean Coinbase, because the ban reaches the issuer and not the platform standing between the issuer and the holder. The prohibition protects the spread from a rate war at the front door while the distribution agreements bleed it out the back. Whats left is a real business, a throughput business that thins per dollar as wallets learn the rotation, which I suspect is exactly why Circle built USYC. The rail, not the yield.
Always follow the money
Line up all three parties and it becomes pretty apparent that the stablecoin issuers will keep the settlement float, protected from a rate war they’re now forbidden to fight and the asset manager takes the store of value, the yield bearing balances that used to sit in a checking account. And the bank loses the cheapest funding it has, the idle balance that cost it nothing, because their depositors no longer need the money to sit still in order to spend it. Nor does the reserve money circle back as lending. The New York Fed studied the partner banks that actually hold issuer cash and found them running more like narrow banks, reserves up 147%, loan to asset ratios down 14 percentage points, because concentrated redemption on demand funding is funding you cannot lend against. And the Fed’s arithmetic says every $100 billion of deposits that leaves and is not recycled back takes $60 to $126 billion of bank lending with it.
Of course banks aren’t defenseless here. A tokenized deposit can pay yield and settle atomically, so a bank can in principle keep the yield bearing balance on its own books, which is why you might imagine JPMorgan put JPMD on Base in late 2025 and onto the Canton Network this year, and why JPMorgan, Citi, Bank of America, and Wells Fargo are reported to be building a shared tokenized deposit network with TCH for early 2027. But the prohibition the community banks are lobbying ain’t going to stop JPMorgan, it actually stops the small banks, because a megabank can stand up a yield bearing deposit token and its really hard for a community bank to do that. And a deposit token is a claim on one bank, not freely composable in an open wallet the way a fund share is, so it cannot become the open yield instrument the whole market really wants. It feels like the defense is real for the largest banks and thin for everyone else, which is the barbell again with the institutions that can build consolidating the function, and the rest have to rent access or lose the balance.
The OCC, to its credit, is not unaware. Question 68 of its own proposal asks whether issuers should be required to keep at least 20% of reserves at insured banks with less than $30 billion in assets, which I imagine as the rule writers wondering aloud whether to pipe some of the water back into the shallow end. It is a question in a comment file, not a rule, and the community bank lobby would trade it in a heartbeat for the thing it actually wants, the prohibition. Their number is the Treasury derived estimate, carried into the Senate by the ABA, of as much as $6.6 trillion in deposits at risk if stablecoins pay yield.
Which is why Sandy Kaul, an asset manager, stands on the banks side of the yield argument. The ban she supports does nothing for deposits. It clears away the one instrument that could have competed with her fund for the same dollar, a stablecoin allowed to pay yield. The community bank lobby thinks it is fighting Circle and Tether. It is fighting BlackRock and Franklin Templeton, and I fear the prohibition it wants is helping them win, because it forces the yield bearing substitute into the one form a bank cannot issue and the rules do not reach, a security.
The flipside
The migration, so far, is small. KlariVis data across 122 community banks shows 96% of them seeing money market outflows, but the net drain is less than a tenth of a percent of balances. Morgan Stanley and Oliver Wyman put a ceiling on the whole thing, no more than 6% of US deposits moving to stablecoins by 2030 even in their bullish scenarios. Those numbers feel real, and they rhyme with the 1970s more than not. Money market funds held about $4 billion when Merrill launched the CMA and $235 billion five years later.
The fund side has weaknesses of its own. A tokenized money fund promises redemption at blockchain speed against Treasuries that still settle a day later, and the last time that mismatch was stress tested, USDC dipped to 87 cents over a weekend. The OCC’s draft would stretch stablecoin redemptions to seven days under strain. Fair weather money is a fair charge, and the deposit’s answer to it, insured, backstopped, redeemable at par on the day everything breaks, is really the best argument the banks have, and the one you rarely hear them make. The ban’s protection is also cyclical. Bindseil at the ECB calls the non-remuneration of money a regulatory original sin, effective at keeping stablecoins unattractive when rates are high and useless when they are low. The Fed held at 3.50 to 3.75% in July with three dissents arguing for a hike. The prohibition has maximum bite at exactly this point in the cycle, and the cycle is not something the OCC can control.
The fight we should name
Its hard not to think of the yield ban being like a referee pulling banks and stablecoins apart, but in reality I think it’s doing something else entirely. It risks drawing the line that sends the store of value function out of the banking system and into capital markets, with stablecoins reduced to the rail that carries the money between them. The stablecoin issuers keep the settlement float. The asset managers take the savings. The deposit that funded bank lending is at risk of moving out of reach.
And it’ll get faster from here, because the rotation between the two instruments will not stay a human behavior. The FCA’s Mills Review already sketches AI agents that execute savings switches automatically through open banking, reducing the customer inertia the deposit franchise is priced on, and McKinsey’s latest global banking review describes software that can monitor balances in real time, sweep idle cash into higher yield accounts, and sweep it back to checking in time for a payment. A yield ban’s bite has always depended on the holder not bothering to move the money. Software is gonna delete bothering.
I think the market has spent a year arguing about the wrong instrument. If the Senate closes the wallet loophole in September, the demotion read will declare victory a second time, and the yield will move again, one wrapper further out, into the one form the perimeter cannot reach without rewriting securities law. Really yield on the stablecoins was a sideshow. The store of value was the prize, and the rules just handed it to capital markets.
References
Regulatory sources
OCC, Implementing the GENIUS Act, NPRM, 91 FR 10202 (Mar. 2, 2026)
FDIC, GENIUS Act Requirements for FDIC-Supervised PPSIs and IDIs, NPRM, 91 FR 18534 (Apr. 10, 2026)
FinCEN and OFAC, PPSI AML/CFT and Sanctions Program Requirements, NPRM, 91 FR 18582 (Apr. 10, 2026)
Market and issuer data
Federal Reserve, “Banks in the Age of Stablecoins” (FEDS Note, Dec. 2025)
Morgan Stanley × Oliver Wyman, “Digital Rails, Real Economics” (May 2026)